2016 Economic Outlook: Development

Industry pros differ on the development outlook for 2016 but see mostly continued strength this year.

2016 Economic Outlook

By any measure, it’s been a good few years for the multifamily industry—rent growth and occupancies have surpassed highs from the last cycle and even set records. As that has happened, builders have started doing what they do best­—building. In 2015, the industry delivered more than 240,000 new apartments in the top 100 markets. So now that the calendar has flipped to 2016, do builders and economists think the good times will continue to roll? They seem to be betting on it, with more than 300,000 units set to be delivered in 2016.

The question is, will the number of apartments being built outstrip demand? Even as more millennials join baby boomers in the apartment market, there is some concern that oversupply could become a problem. But others feel this cycle has a lot of runway remaining.

For years, Steve Patterson, president of Miami-based Related Group’s Multifamily Division, believed that the millennial generation would fill leasing offices and business would be great. By and large, though, that hasn’t happened, as more young people are living with their parents longer. But another generation is making inroads: baby boomers. That demand is driving Related’s development engine, which plans to slightly increase its starts, to 2,800 units, in 2016, mostly in its Florida markets of Fort Lauderdale, Orlando, and Tampa Bay.

Alliance Residential, the industry’s No. 1 builder in 2013 and 2014, plans to start 8,000 units in 2016, with a strong focus on Seattle; Portland, Ore.; and Northern and Southern California. That’s 200-plus more starts than the firm did in 2015.

Boomer demand is also helping drive the Phoenix-based company’s growth. As Alliance Residential president and COO Jay Hiemenz notes, boomers are switching lifestyles, “continuing to move back into the cities, selling the bigger houses in the ’burbs.”

Within the next three to five years, Patterson is confident, millennials will have to move out of their parents’ homes and start households of their own. And when they finally do, he expects there to be a few familiar faces.

“When they go to these communities to lease apartments,” says Patterson, “they’re going to be running into their parents. The boomers are going to be there at the same time. I think that’s going to create a groundswell for the multifamily industry that we’ve never seen in my entire [33-year] career.”

Too much supply?

To accommodate these boomers, millennials, and everyone else who is looking to rent, Mark Obrinsky, senior vice president for research and chief economist for the National Multifamily Housing Council, says the industry needs to build 300,000 to 400,000 new apartments a year to keep up with demand as it stands now. He forecasts that the industry will be within that mark in 2016, as he downplays oversupply concerns.

“Too much would mean they’re building new units and they can’t get them leased up,” Obrinsky says, “or they can get leased up by bringing on lots of concessions. So far, that hasn’t been the case.”

“They’re developing in an environment where we’ve already seen vacancy going up,” Severino adds. “Between the first quarter of 2013 and the third quarter [of 2015], Class A vacancy went from 4.6% to 5.7%, so that’s a 110-basis-point increase, and that’s before we get the glut of new supply that’s going to be coming on line.”

Severino would like to see just 150,000 to 170,000 new units come to market this year, but he predicts the actual number will be in the low 200,000s.

“I don’t think it’s a massive overbuilding situation,” he says, “but I do think you’ll see vacancy nationally drifting higher over the next four or five years.”

Brian Croce is an associate editor for Hanley Wood's Residential Construction Group. He covers business and news for Builder and Multifamily Executive magazines. Connect with him on Twitter at @bcroce_hw.

About the Author

Brian Croce is an associate editor for Hanley Wood's Residential Construction Group. He covers business and news for Builder and Multifamily Executive magazines. Connect with him on Twitter at @bcroce_hw.